States Considering Prize-Linked Savings Programs

Credit unions want permission to award cash and prizes to customers who save.

Putting aside savings has been tough, especially when the Great Recession forced Americans to rely on liquidating assets like nest eggs and retirement accounts to get by. It’s even harder for low-income families to save. But an unusual savings approach that has already taken hold abroad is now spreading to the United States.

Prize-linked savings (PLS) programs, as they are known, allow holders the opportunity to win electronics or cash prizes for contributing to their savings. Generally, some of the interest earned on deposits goes toward these prizes. They’re popular around the world: The United Kingdom’s PLS program, for example, has more than 23 million holdings and offers prizes of up to 1 million pounds.

“This is a pretty cool and appropriate, timely way ... to take advantage of our natural human desire to have a little bit of excitement, a little bit of suspense, a little bit of fun built into an activity that, let’s face it, otherwise people consider pretty dry or even the very definition of self-denial,” says Doorways to Dreams (D2D) Fund Executive Director Timothy Flacke.

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The D2D Fund is a nonprofit working to help low- and moderate-income individuals build assets, and has helped pilot PLS programs in the U.S. In October 2006, Centra Credit Union in Indiana piloted the first PLS program, which saw more than 1,000 accounts opened and received more than $500,000 in deposits within five months. In 2009, eight Michigan credit unions started a larger PLS program, offering winnings of up to $100,000. Within a year, almost 12,000 accounts were opened and more than $8.5 million was saved. Michigan’s program has since expanded to include more credit unions.

Flacke says that several state legislators, credit unions and nonprofits helping underserved families have approached the D2D Fund about starting a PLS program in their states.

But some states have laws against private lotteries. Since credit unions are nonprofit institutions, however, they may be able to take advantage of exceptions to such laws. Some states are writing bills to explicitly allow credit unions to start PLS programs. Iowa, Mississippi, Nebraska, New Mexico and Washington saw bills introduced this year; Maine, Maryland and Rhode Island passed such laws last year.

“It couldn’t be clearer after the events of the last two and a half years that so many of us are living in a state of vulnerability,” Flacke says. “It should be a national priority to encourage all of us to be focusing on building our own stability, our own financial security.”